If 2013 was the year the green bond market finally took
root, 2014 could very well be the one it begins to flourish.
One sign of the markets maturation is the arrival of the
first index dedicated entirely to green bonds. The Solactive
Green Bond index, launched March 12 by Frankfurt-based index
provider Solactive, comprises bonds categorized as
green  that is, those that raise capital for a project
with specific environmental benefits  by the Climate
Bonds Initiative, a nonprofit organization headquartered in
London.

To date, the index includes 33 bonds, all at least $100
million in size and of varying credit ratings, with a total
market value of $19.3 billion. Most of the bonds have been
issued by utilities and energy companies for renewables
projects or by supranational organizations, such as the
World Banks International Finance Corp. , the
European Investment Bank and the African Development Bank. The
former includes Novembers 1.4 billion ($1.9
billion) bond issue from French energy group Electricité
de France (EDF), the first euro-denominated green bond from a
large company, which was reportedly twice oversubscribed.

The recently issued £250 million ($415 million) bond
that hit the market March 19, from London- and Rotterdam,
Netherlandsbased Unilever, the worlds third-largest
consumer goods firm, will also be included.

The Unilever issue marks another first for green bonds and
could help turn them from a niche product into a mainstream
financial instrument. That's because the company plans to use
the proceeds not for a self-evidently green project such as
renewable energy but to reduce the environmental footprint of
its ordinary activities by decreasing waste, water use and
greenhouse-gas emissions.

The Solactive index does not include securitizations, so the
company will not add the recent offering from Toyota Motor
Corp., the first green auto securitization, launched in late
March. Still, this deal can be cited as yet another sign of the
markets development. Backed by future loans and leases of
hybrid and electric vehicles, the deal priced at $1.75 billion,
more than twice its original $775 million.

The issue was very well received. It was well
understood that Toyota has a good following, says Michael
Eckhart, global head of environmental finance and
sustainability for Citigroup in New York, which served as joint
book runner along with Bank of America Merrill Lynch and Morgan
Stanley. This broadened the investor base to some extent,
bringing socially responsible investors
to a Toyota placement for the first time.

The EDF, Unilever and Toyota issues illustrate a shift in
the dynamic of the fixed-income market. Demand is outweighing
supply, participants say, though some of that can be attributed
to the general appetite for corporate bonds. And whereas institutional
investors played the main role in early days of
supranational issuance, that has changed over the past year.
Now investment managers have taken over as the markets
largest investor group.

Eckhart reckons that Citis recent deals have seen
roughly 55 percent of allocations come from asset or fund
managers, and roughly 45 percent from other investors,
such as
pensions and insurance companies.

What I find exciting is that no ones questioning
the fact that [a deal] is green, says Cathy Roy, senior
vice president and CIO of
fixed income at Bethesda, Marylandbased sustainable
investment firm Calvert Investments and a portfolio manager of
the Calvert Green Bond Fund, which launched in October.
Theyre not saying, Wait a minute; is it
offering enough yield? Am I giving up something? The
bonds are being issued right in line with any comparable
corporate in terms of pricing.

Judging by numbers from the first quarter of 2014, signs
point to continued growth in the green bond market. Data
provider Dealogic puts year-to-date global green bond volume at
$7.4 billion via 19 issues, a faster pace compared with the 29
bonds totaling $11 billion issued for all of last year, which
was already a fivefold increase over 2012. Some experts
anticipate that the market will top $50 billion in 2014.

The development of the Green Bond Principles, which were
released in January, is likely to drive volume, according to
bankers. Drafted by Bank of America Merrill Lynch, Citi,
Crédit Agricole CIB and J.P. Morgan and endorsed by
scores of other banks, the principles are voluntary guidelines
as to what constitutes a green bond, as well as how to report
the ways in which the money raised is being spent. This is
important because without transparency,
investors cannot ensure a company is actually using a green
bond issues proceeds for environmentally friendly
projects.

[The principles] are what the green bond market
needed, says Citigroups Eckhart. It is
working right away, and all the feedback that banks are getting
is that there are a large number of deals coming pretty
quickly.

Whether or not the new index will also help facilitate
growth remains to be seen. But market participants agree that
it is a positive development. The way the index might
support the markets growth indirectly is that its a
strong signal that green bonds as an asset type within an asset
class have reached a certain maturity and size, says
Manuel Lewin, head of responsible investment at Zurich
Insurance Co. in New York. In November the Swiss insurer
committed $1 billion to green bonds and appointed BlackRock
to run its portfolio. And it will allow asset managers to
think more about offering a product, so that may lead to more
growth.

According to Solactive, which later this year plans to
launch a climate-themed bond index, the green bond index is
already catching the eye of product developers. What is
great so far is that we have received interest from issuers of
structured products; they mean to use the index as the
underlying for a capital-guaranteed product, says
Solactive CEO Steffen Scheuble. Weve also received
interest from an ETF issuer, and were currently in
discussions with two institutional clients who might be
interested.